Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal (12/24/25)

As I close out my postings for the year, I decided to report on Castro v. United States, 2023 WL 8825316 (5th Cir. 12/21/23), unpublished (CA 5 here; GS here). The Fifth Circuit panel did not think it worthy of publication, so I initially decided to forego making it a topic of a blog. But then I learned that the plaintiff, John Anthony Castro, has been “player” in a series of tax cases is a presidential candidate, a Republican seeking to take Trump’s place as the frontrunner and ultimate nominee. See Castro’s Wikipedia page here (i) offering significant discussion of his playing in tax cases and (ii) noting that his status as a licensed attorney may be in doubt. So, I’ll discuss the recent 5^th Circuit opinion, for its discussion of settled law that do not justify a precedential opinion. In this opinion, Castro appears as plaintiff rather than as attorney (although, I suppose, he could be pro se attorney for himself).

In order avoid recreating the wheel with new discussion (with no temptation to plagiarize or make up new words without value) and given that brevity of the relevant discussion in the opinion, I just quote the opinion (using the cleaned up technique to eliminate parts that are not relevant to the point I want to make).

During an IRS criminal investigation into Castro, criminal investigative agent Tuan Ma (“Agent Ma”) contacted two potential witnesses to obtain information in furtherance of his investigation. The parties dispute whether Agent Ma disclosed to the two potential witnesses that Castro was under criminal investigation but that the investigation did not target the two potential witnesses. For the purpose of summary judgment, we assume that Agent Ma did in fact disclose such information to the two potential witnesses. The two potential witnesses submitted affidavits indicating that they spoke with Agent Ma after he reassured them that they were not under investigation.

            Even accepting as true that Agent Ma made the alleged disclosures in violation of §6103 of the Internal Revenue Code, a safe harbor provision shields the Government from liability if the agent's disclosure was based on “a good faith, but erroneous, interpretation of section 6103[.]” 26 U.S.C. §7431(b)(1) (“No liability shall arise under this section with respect to any inspection or disclosure . . . which results from a good faith, but erroneous, interpretation of section 6103[.]”). This circuit uses an objective standard to evaluate the applicability of this “good faith” exception to liability under the Internal Revenue Code.

Article on The Tax Contribution to Deference and APA § 706 Posted on SSRN (12/14/23)

I have just posted this article to SSRN here.

The recommended SSRN cite is: Townsend, John A. and Townsend, John A., The Tax Contribution to Deference and APA § 706 (December 14, 2023). I don’t know why SSRN doubles up on my name, but have just not tracked it down. (If anyone knows how to fix that, please send me an email.)

 The abstract is at the link and then links to the pdf version. Here is my abstract of the SSRN abstract.

The tax authorities supporting APA to include deference are compelling. These tax authorities have been marginalized in the discussion. The law at the time of the APA in 1946 was settled to include deference when (i) the statute was ambiguous and (ii) the agency interpretation within the scope of the ambiguity was reasonable. That was Chevron deference before Chevron. That alone would support interpreting APA § 706 to include deference. But, there is more, § 706 states the standard of review for interpretations “not in accordance with law” which the Supreme Court interpreted in Dobson, a 1943 tax case, to mean review with deference rather than review de novo.

There is a lot of tax history in this rather short article. One key matter of interest is the roles in the tax system occupied by Justice Robert H. Jackson, Wikipedia here. He served successively in the following positions: Chief Counsel of the IRS, Assistant Attorney General Tax Division, Solicitor General, Attorney General, and Supreme Court Justice. He moved into all of those positions in a period of less than 10 years. Later, he also took a leave of absence from the Supreme Court to be the chief prosecutor at the Nuremburg war crimes trial. Jackson features prominently in the article as author of the Dobson decision, a unanimous decision, which authoritatively interpreted the Tax Court standard of review "not in accordance with law" to mean deference--hence Dobson deference--much like Chevron deference. The standard "not in accordance with law was incorporated in APA § 706.

I would appreciate any comments anyone would care to make to me.  My email address is jack@tjtaxlaw.com.

Fun Fact: The original draft of this article was over 140 pages long. I then bumped it down to 47 pages. It now is 32 (including appendix with the versions as it moved from the AG Final Report in 1941 to enactment in 1946).

Fun Chevron: AI Weighs in on Chevron’s Future (and Golsen) (12/12/23)

Chevron deference and its possible demise is much in the news recently with the Supreme Court’s acceptance of two parallel cases that address the following question: 

Whether the Court should overrule Chevron or, at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451), here; and Relentless, Inc. v. Department of Commerce (Sup. Ct. Dkt 22-1219), here.

I decided to ask various AI platforms what they could offer on whether the Supreme Court will overrule Chevron deference. Here are the answers from three AI platforms (alphabetical order by AI platform without only formatting (such as bold face) offered by the AI; Chevron is not formatted) [Note that I use the free-to-me versions of each platform]:

Bard (Google)

Whether the Supreme Court will overrule Chevron deference is uncertain. While there are indications suggesting both possibilities, ultimately the Court's decision will depend on the specific case and the justices' interpretations of the law.

Arguments in favor of overruling Chevron deference:

• Increased judicial activism: Some argue that Chevron deference grants excessive power to federal agencies, diminishing the role of the judiciary in interpreting the law.
• Lack of democratic accountability: Others argue that agencies are not accountable to the same democratic processes as elected officials, making Chevron deference potentially undemocratic.
• Concerns about agency expertise: Some believe that agencies may not always have the necessary expertise to interpret complex laws.

Arguments in favor of retaining Chevron deference:

• Promotes administrative efficiency: Chevron deference allows agencies to implement and enforce laws without lengthy court challenges, promoting efficiency.
• Recognizes agency expertise: Agencies often possess specialized knowledge and experience relevant to the laws they administer.
• Reduces judicial workload: Deference to agency interpretations can reduce the burden on the courts, allowing them to focus on other matters.

Recent developments:

• Supreme Court agrees to hear case challenging Chevron deference: In May 2023, the Supreme Court agreed to hear a case related to the National Marine Fisheries Service's interpretation of a fishing law. The case could have significant implications for Chevron deference.
• Conservative justices express skepticism: Some conservative justices have expressed skepticism towards Chevron deference, suggesting a potential shift in the Court's stance.

Conclusion:

It is too early to predict whether the Supreme Court will overrule Chevron deference. The Court's decision will likely depend on the specific arguments presented in the case and the justices' individual interpretations of the law. However, recent developments suggest that the Court may be more receptive to challenges to Chevron deference than in the past.

Here are some resources that provide further information on this topic:

• Deference and its Discontents: Will the Supreme Court Overrule Chevron? (CRS Report): https://thehill.com/opinion/judiciary/4238063-what-happens-if-the-supreme-court-overturns-chevron/
• Supreme Court to Consider Major Case on Power of Federal Regulatory Agencies (SCOTUSblog): https://www.scotusblog.com/2021/11/chevron-deference-at-stake-in-fight-over-payments-for-hospital-drugs/
• Supreme Court to Consider Overruling Chevron Deference (Baird Holm LLP): https://www.theregreview.org/2022/07/14/pierce-chevron-deference/  [JAT Note: the link is to an article by Richard Pierce, a noted expert in administrative law]

On the Tax Court's Golsen Rule (12/3/23; 12/5/23)

In Kraske v. Commissioner, 161 T.C.___ No. 7 (2023), GS here, the Court provides a good application of its Golsen rule. Golsen v. Commissioner, 54 T.C. 742, 756-58 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971), cert. denied, 404 U.S. 940 (1971). The Golsen rule, in brief, is that, in the case before it, the Tax Court will adopt a square prior holding of the court of appeals to which the case is appealable even if the Tax Court believes that Circuit's prior holding is wrong. Kraske gives me an opportunity to expound briefly on Golsen. 

Short statements about the Golsen Rule.

• The rule prior to Golsen was called the Lawrence rule. Lawrence v. Commissioner, 27 T.C. 713, 718 (1957), rev’d, 258 F.2d 562 (9th Cir. 1958). The Lawrence rule was that the Tax Court should apply the interpretation it felt best regardless of appeal to a Circuit which, through prior precedent, was likely to reverse. Golsen is a rule of judicial expedience.
• In determining whether there is such a conflict between the Tax Court’s best interpretation and the relevant Circuit Court’s holding, the Tax Court should determine whether the court of appeals decision at issue “is so clearly on point that it would be futile” to issue a decision contrary to it. See Sanders v. Commissioner, 161 T.C. ___ No. 8, *6-*7 (2023) here (reviewed opinion on the jurisdictional issue). I analogize this review to the much-ballyhooed Chevron Footnote 9 rigorous statutory interpretation to eliminate ambiguity at Chevron Step One. If by vigorous review of the Circuit’s case authority, the Tax Court finds that the authority is not squarely on point (meaning, I think, that the authority can be meaningfully distinguished or otherwise not applicable), the Tax Court can then apply its own best interpretation.
• Professor Camp says that the Golsen rule requires that the Tax Court “basically decide the likelihood that the Circuit Court of Appeals would reverse the Tax Court in the case at hand.” Bryan Camp, Lesson From The Tax Court: The Rules For Penalty Approval Depend On Geography (Tax Prof Blog 10/30/23), here, discussing Kraske. That raises the question whether a trial court such as the Tax Court can reasonably predict that a higher court would reverse; after all, the Circuit could reconsider and reverse its prior holding. That’s a judgment call which I don't think factors in that possibility. If the Tax Court makes the wrong judgment, I’m sure the Circuit Court will let it know.
• Where the Circuit’s interpretation is not squarely in point, concerns for “uniformity in interpretation” throughout the country require that the Tax Court apply its own best interpretation. Lardas v. Commissioner, 99 T.C. 490, 494-5 (1992).

Tax Case Illustrating the First Rule of Persuasion--Avoid Irritating the Person You Seek to Persuade (12/3/23)

In Fitzgerald Truck Parts, Inc. v. United States, 2023 WL 8100540, 2023 U.S. Dist. LEXIS 208420 (M.D. Tenn. 11/21/23), CL here and GS here, “After a trial held in Cookeville, Tennessee between July 10 and July 14, 2023, a jury found that Fitzgerald Truck Parts and Sales, LLC (“Fitzgerald”) was not liable for excise tax on some  12,830 glider semi trucks sold between 2012 and 2017.” The Government moved for Judgment as a Matter of Law or New Trial. The Court denied the motion.

I am not sure there is any federal tax procedure issue involved in the opinion, except that tax procedure necessarily involves trial procedures. For that reason, this decision is a doozy, primarily because the judge appears (my inference) to be irritated with the Government claims on the motion.

The essential facts are recounted in the opinion (pp. 1-3 bold face supplied by JAT):

          For more than 30 years, and up until Environmental Protection Agency (“EPA”) regulations essentially abolished the market, Fitzgerald manufactured glider semi-trucks. It did so by placing rebuilt engines and transmissions from wrecked highway tractors into glider kits produced by original equipment manufacturers. The kits from those manufacturers generally included such things as the cab, frame, sheet metal, mounting brackets and steering gear, to which the rebuilt powertrains were then added. Through this method, the goal was to offer for sale essentially a new truck – albeit with a rebuilt engine and transmission – at a lower price than a comparable truck from the factory.

          Not only did the customer receive a reduction in price, the customer was also not on the hook for  excise taxes, at least if the governing regulations were followed. Herein lies the core of the parties’ dispute.

          Under the Internal Revenue Code, a 12% federal excise tax is imposed “on the first retail sale” of “tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.” 26 U.S.C. § 4051(a)(1). The code also contains a safe harbor provision that states:

(f) Certain repairs and modifications not treated as manufacture (1) In general An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.

26 U.S.C. § 4052(f)(1).

          It has been Fitzgerald’s position throughout that the trucks it produced met the safe harbor [*3] provision. The Internal Revenue Service (“IRS”) disagrees. In accordance with IRS regulations, Fitzgerald paid the excise tax on one truck for each quarter of the tax years at issue, meaning excise taxes were not paid on some 12,800-plus gliders. The stakes are enormous, especially for a company that is no longer producing trucks, and never collected the excise tax from the purchaser in the first place. Those taxes are more than ten million dollars. Penalties and interest place that figure in the neighborhood of $300 million.

Justice Sandra Day O'Connor, Tufts, Chevron Deference, Dobson Deference, and APA § 706 (12/2/23)

Yesterday, Sandra Day O’Connor died. See Linda Greenhouse, Sandra Day O’Connor, First Woman on the Supreme Court, Is Dead at 93 (NYT 12/1/23), here. She served many iconic roles in our legal history. I won’t attempt to catalog those roles and her achievements. I present in this blog some of her history in a tax and administrative law context that I hope is of some interest to some readers. 

In 1983, Justice O’Connor burst into my consciousness because of her concurring opinion in Tufts v. Commissioner, 461 U.S. 300 (1983), here. Tufts addressed an issue arising from the then infamous footnote 37 in  Crane v. Commissioner, 331 U. S. 1  14 n. 37 (1947), here. See for an illustrative discussion of Crane’s importance in the tax law in a series on important cases in different disciplines, Vada W. Lindsey, The IRS’s Hollow Victory in Crane v. Commissioner, 331 U.S. 1 (1947), here. (noting that, by itself, Crane may not seem important but its importance ever after is in the term “tax shelter,” which I discuss below)

Crane addressed the issue of how to treat the taxpayer’s disposition of property subject to a nonrecourse debt. The taxpayer there had acquired the property subject to a nonrecourse debt equal to the value of the property; the taxpayer included the nonrecourse debt in the basis for the property, and, while she held the property, had taken depreciation on tax basis including the nonrecourse debt. The taxpayer then disposed of the property subject to the nonrecourse debt. The question was whether, in reporting the tax consequences on disposition, the taxpayer should include the nonrecourse debt and any other consideration (there $2,500 cash) in amount realized. The amount realized is the minuend of the calculation of gain realized; from that minuend, basis is subtracted (subtrahend) to compute gain realized. The Court held that the nonrecourse debt was included in the calculations as follows:

1	Cash (net)	$2,500
2	Nonrecourse debt	$200,000
3	Amount Realized (1+2)	$202,500
4	Less Undepreciated Basis *	($175,000)
5	Yields Gain Realized (3-4)	$127,500

This calculation comports with the actual tax results, where the taxpayer had taken $25,000 in depreciation offsetting other income but had walked away with cash of $2,500 net from dealing in property. The tax books balance by including the nonrecourse debt in amount realized. If the Court had held the amount of the nonrecourse debt was not included in the amount realized calculation, the tax books would not have balanced because the taxpayer would have gained the interim depreciation offsetting other income without some balancing to account for the fact that the debt was nonrecourse meaning the taxpayer never paid for the tax deductions (either in cash or an equivalent amount of offsetting income).

Crane involved property worth the value of the nonrecourse debt at acquisition and disposition. The Court said in fn. 37:

   n37 Obviously, if the value of the property is less than the amount of the mortgage, a mortgagor who is not personally liable cannot realize a benefit equal to the mortgage. Consequently, a different problem might be encountered where a mortgagor abandoned the property or transferred it subject to the mortgage without receiving boot. That is not this case.

Crane and its implications, fn. 37 in particular, spawned many tax shelters (abusive and otherwise) where taxpayers could acquire property subject to nonrecourse debt, claim the tax benefits of a “cost” basis in the property including the nonrecourse debt that would never cost anything, and then, to the extent that the nonrecourse debt exceeded the value of the property, never have a balancing tax entry because not included in calculation of amount realized.

Most of the abusive tax shelters have a familiar theme generally—false excessive valuations of the property with false deductions for depreciation or some other tax benefits (e.g., credits). The current in vogue abusive tax shelter is the syndicated conservation easement, the abusive variety of which depend on grossly excessive valuations to “justify” claimed charitable contribution deductions. In earlier times based on what some read as the implications of Crane, shelter promoters “sold” the opportunity for deductions that would never cost anything (including never being reversed by income inclusions). (Of course, the more “white-shoe” variety of abusive tax shelters, the transfer pricing abuse, involve abusive valuations in transfer pricing.)

Liberty Global Confirms the Saying that, for Forum Choice, Taxpayers Should Avoid the Tax Court When Claims Lack Technical Merit (12/1/23; 3/9/24)

In Liberty Global Inc. v. Commissioner, 161 T.C. ___ No. 10 (11/8/23), GS here, the Court held against the taxpayer on its claims based the Overall Foreign Loss (“OFL”) provisions of the Code. Judge Toro does a nice job of explaining the provisions (with some easy (relatively) to understand examples, so I won’t attempt to here).

I post the case here because I have related cases which involved tax procedure issues. Given the amounts involved discussed in the Tax Court case, it is not surprising that Liberty Global left no stone unturned to avoid the result the Tax Court now delivered. The prior postings are (in reverse chronological order):

• Liberty Global Court Holds that Government May Proceed by Collection Suit without a Notice of Deficiency (Federal Tax Procedure Blog8/13/23), here.
• Further Commotion in Liberty Global Collection Suit Over Whether a Notice of Deficiency Is Required Before Collection Suit (Federal Tax Procedure Blog1/16/23; 1/19/23), here.
• Government Files Collection Suit in Liberty Global Raising Procedural Issues (Federal Tax Procedure Blog 10/8/22; 10/12/22), here.
• Court Invalidates Regulation for Invalidity of Good Cause Statement (Federal Tax Procedure Blog 4/6/22), here.

JAT Comments:

1. The taxpayer reported the transaction on 2010 return Schedule UTP (Form 1120), Uncertain Tax Position Statement as follows (Slip Op. 5):

[Liberty Global] entered into a transaction to sell its entire interest in its Japanese subsidiary, [J:COM], during the year. [Liberty Global] recognized a gain on the sale and due to recharacterization of the gain also recognized deemed section 902 credits as part of the overall transaction. The issues are the application of the rules under section 904 to the transaction and whether the amount of the foreign tax credit taken as a result of the transaction is appropriate.

I presume that the disclosure got the IRS’s attention. At least in this case UTP worked. 

Added 3/9/24 9:00 pm: The UTP disclosure apparently avoided the IRS assertion of a penalty. For a good discussion of this case, see Lee A. Sheppard, Foreign Tax Credit Recapture and Schedule UTP, 113 Tax Notes Int'l 421 (1/22/24).